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Is Oil Topping Out?

11/18/03 07:51:10 AM
by Gary Grosschadl

The price of crude oil has been testing overhead resistance and will be making a decisive move from here but which way?

Security:   $WTIC
Position:   Hold

As the weekly chart shows, the price of crude has had good support above its 200-period EMA (exponential moving average) for the past 18 months. In doing so it has traced out a possible topping pattern via a head and shoulders formation. This 200-period EMA for practical purposes serves as a slanted neckline. The bottom of the right shoulder survived a test of the pattern and the bearish move down last September was negated. Now the top of that shoulder is being tested a second time.

There is obvious resistance at that $33 level as it has been tested four times since last May. Is this pointing to a coming breakout or a return to another neckline test? Several indicators can help give insight here.

Weekly chart shows the pattern challenge oil is facing.
Graphic provided by:
The trend strength indicator at the top of the chart hints at a lack of directional power which makes a breakout questionable. Although the DIs are in bullish form, the ADX, or strength component, is very weak at 12.2 and too far from the DIs to make a bullish argument. The remaining indicators all show a similar predicament, being at potential stall levels. Under nontrending conditions, as the weak ADX suggests, the stochastic oscillator is often a very reliable upleg/downleg indicator. Typically downturns from the 80 level occur in overbought conditions and this 80 mark has been reached so a downturn could ensue very soon.

Failure to break through this upside barrier at $33 will most likely result in another test of the pattern neckline at $27. Traders should be prepared for an important move at that critical juncture. Either a head and shoulders pattern coming to downside fruition or yet another upside bounce; either way it should be tradeable.

Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

E-mail address:

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